Q3 2021 Yellow Corp Earnings Call
Good afternoon, everyone and welcome to yellow corporations third corner of 2021 earnings call.
All participants will be in a listen only mode. After today's presentation, there will be a question and answer session.
He's also notes hideous event is being recorded.
At this time I'd like to turn the comments all over to Tony Karena, <unk>, Vice President of Investor Relations.
Sir Please go ahead.
Thank you operator, and good afternoon, everyone welcome.
[noise] welcome to yellow corporations third quarter of 2021 earnings conference call.
Joining us on the call today are Darren Hawkins Chief Executive Officer.
Dan Olivia Air Chief Financial Officer, and Darryl Harris President.
During this call we may make some forward looking statements within the meaning of federal Securities law.
These forward looking statements and all of those statements that might be made on this call, which are not historical facts are subject to uncertainty and a number of risks and therefore actual results may differ materially.
Format is call does not allow us to fully discussed all these risk factors for a full discussion of the risk factors that could cause the results to differ please refer to this afternoon as earnings release in our most recent SEC filings, including our forms 10-K and 10-Q.
These items are also available on our website at my yellow Dot com.
Additionally, please see today's release, where to reconciliation of net income or loss to adjusted EBITDA.
Conjunction with today's earnings release, we issued a presentation, which made your reference during the call. The presentation was filed and an 8-K along with the Orange release is available on our website.
I will now turn the call over to Darren.
Thanks, Tony and good afternoon, everyone. Thank you for joining our call before I discuss Q3, I would like to recognize and think are nearly 30000 employees truckers are heroes and they continue to rise to the challenge and provide a central freight transportation services.
As to the customers and communities. We serve our employees are an essential pace of the U S supply chain and I am grateful for their efforts.
Turning to Q3, we reported adjusted EBITDA of 94.4 million, a greater than 50% increase compared to a year ago. We are executing our yields strategy that is not only benefiting the company by improving the quality and profitability of the fries flowing through our more than three.
Hundred terminals, but it is also helping us manage through the industry wide shortage of qualified drivers and dockworkers. In addition to purchase transportation headwinds the strong pricing trends that we saw in queue to gain momentum during Q3 and led to a year over year increase in.
L T L revenue per hundredweight, including fuel of 20.7% favorable year over year pricing trends have carried into queue for for the month of October yellow average between nine and 10% on contract negotiations the frayed back.
Drop remains strong driven by continued consumer and business demand. In addition to a limited ability to expand capacity across the supply chain.
As we look ahead demand for the valuable capacity and services, we provide to the U S economy is poised to remain at an elevated level into 2022.
Although our year over year LPL tonnage per day decrease in Q3, let me be clear that our long term strategy is to grow the business. This incredibly strong fries cycle is a tailwind as we expedite the culling of less profitable freight from the network and simultaneously execute them.
Multi year transformation to one yellow.
We remain on schedule to have all of our companies on a single operating system across the network, which is the technology Lynch pans for one yellow during two three red away was converted and is now operating on the one yellow technology platform, joining wire sea freight and new Pan we also.
Expect to convert Holland around the end of this year when completed this will be the cornerstone of our fully integrated network and it will allow us to continue streamlining our operations effective Tuesday of next week, we will rebrand Henry logistics as yellow logistics too.
Align with the journey to one yellow the changes customer focused and will allow them to ultimately work with one brand across all of our extensive core LTM resources capabilities and multimode logistics solutions.
Through the end of Q3, we have acquired a majority of the equipment expected in our 2021 capital expenditures plan, we placed orders for much of the new equipment in 2020, which minimize significant delays and deliberate this year. During the first three quarters of 2021, we have acquired more.
Then 2100 tractors 2300 trailers and 600 containers not only are these investments having a positive impact on the age of our fleet, but over time, we expect them to mitigate maintenance expands and help our sustainability efforts through enhanced safety and improve fuel efficiency.
I will now turn the call over to Diane who will share additional details about the quarter.
Thank you Darren and good afternoon, everyone for third quarter of 2021 operating revenue was $1.3 billion, an increase of 10% compared to 1.18 billion in 2020.
Operating income was $48.4 million compared to $19.4 million and the prior year.
Adjusted EBITDA for the third quarter of 2021 was $94.4 million compared to $62 million in the third quarter of 2020.
Adjusted EBITDA for the last 12 months with $248 4 million as of the end of the third quarter.
Our revenue growth of 10% in the third quarter reflected a year over year LCL tenants per day decline of 9.4%.
Driven by six 8% decrease in LCL shipments per day, and at 2.8% decrease in <unk> wait for shipment.
Sequential LCL tenants per day trends compared to the prior year, whereas follows.
July down five 7% August down 8.5% in September down 13.4%.
On a preliminary basis October LPL tonnage per workday was down around 10%.
Including fuel surcharge third quarter LPL revenue per hundredweight was up 27% in <unk> revenue per shipment was up 17.3% compared to the prior year.
Excluding fuel surcharge LDL revenue per hundredweight was up 15.6% in <unk> revenue per shipment was up 12.4%.
Our near term focus on prioritizing yield over volume.
Along with the execution of targeted pricing strategies to address unprofitable freight in our network and to mitigate our highest cost purchase transportation expenses were key to our improved performance in Q3.
Pte expenses as a percentage of revenue have decreased from 16.7% in Q1, 216.0% in Q2, and we're 15.4% in Q3.
During the quarter, we saw sequential improvement and adjusted EBITDA operating income and operating ratio, culminating in September being the best performing month during the quarter and thus far in 2021.
Total liquidity at the end of the third quarter was $409 million compared to $454 million at the end of the third quarter of 2020.
And total capital expenditures for the third quarter, where $97 million compared to $17 million a year ago.
Year to date capital expenditures through the third quarter, where $443 million and we still expect total capital expenditures for 2021 to be in the range of $480 million to $530 million.
Also pertaining to liquidity during 2020, we deferred payment of $85 $6 million for certain payroll taxes under provisions of the cares Act.
As a reminder, half of that deferral 42.8 million comes do and will be paid in December of 2021.
And the other half will be doing December of 2022.
With that I'll turn the call over to Darryl.
Thank you Dan and good afternoon, everyone.
Since the beginning of the year, we have work to reduce the reliance on purchase transportation expense.
In particular, the use of local cartage, an over the road PT.
Additional actions we have taken include.
Urging the network a short term rentals as we acquired newer equipment.
And adjusting our line-haul network to minimize the use of more expensive purchase transportation in certain lines.
As you heard from Dan. These efforts have allowed us to reduce petey spend as a percentage of revenue.
Even as we continue to experience strong demand and a backlog use supply chain.
<unk> is our second largest expense category outside of salaries and wages and we will continue to closely manage achieves.
Another area of emphasis has been the enhancement of our hiring and retention strategies.
We remain committed to our long term strategy to grow our own safe drivers.
Are 16 driver Academy sites were fully utilized in Q3 with a record number of participants in the program.
In addition, we have held 127 hiring events and 14 job fairs across the country year to date.
And starting this winter we are launching an exciting new recruiting effort called drive for diversity, where we will focus our efforts on jobseekers in underserved communities.
With the growing need for skilled labor in our country, we intend to be on the forefront to attract talented individuals that may have never worked in trucking, including women minorities and younger people.
As you heard from Darren we are executing on our transformation strategy.
As we unite our companies to become one yellow.
As we combine them, we are automating centralising and standardizing our operations across the business.
We are well on our way to becoming a superregional carrier that will enhance the value proposition for our customers by getting faster, creating more next day length and offering regional service in new locations.
When the journey is complete we will go to market as one yellow a superregional carrier laser focused on enhancing the customer experience and growing our business.
In closing.
We are making progress in our team of over 30000 freight professionals is moving the company in the right direction.
We are in one of the most unique and challenging supply chain environments that we have ever seen.
Yet our employees remained focused on meeting the needs of our customers, while maintaining steady progress on our journey to one yellow.
I will now turn the call back over to Darren for some closing comments.
Thank you Darren.
Am proud of the progress we've made in Q3 and I am confident that the transformation of the one yellow positions us for continued operational and financial improvement in the future.
We have the right team at yellow to operate a superregional LDL network that safely meets our customers needs with speed reliability and quality.
Thanks for your time. This afternoon, we would now be happy to answer any questions that you may have.
Ladies and gentlemen at this time, we will begin the question and answer session.
Our first question today comes from.
Jack Atkins from Stevens. Please go ahead with your question.
Okay, Great Darren Darryl Dan.
Congratulations on a great corner. Good afternoon. Thank you Jack good afternoon to you afternoon, Jack Alright, well I guess, maybe if I could start.
Erin.
Whoever would like to take this and maybe you'd both like to address it but.
Asleep.
Look out here over the next.
Several quarters.
Like there's a lot more to come with one yellow and that one yellow initiative and did you guys combine your operating entities on the acid based side.
I would be curious if you can maybe talk about.
I was wondering what are you in in terms of.
Implementing one yellow I know you have one more operating company to go by the end of the year, but.
How much of the improved performance that you've seen over the last several quarters is related to that initiative, maybe beginning to take hold.
And is it really sort of more 2022 that you think you're going to start seeing.
The efficiencies from that begin to show up in the P&L.
Jack I'll start with that and then allow Daryl to wrap it up.
I'd say, we are in the sixth inning, the longest and most difficult part of one yellow is a technology transition we started that several years ago and working through that.
I made the commitment that we would not allow our customers to have any negative impact through that process. So we've been very stable focused and paste as we moved each company over to the yellow technology that has gone very well I am proud to say that we're right at the end of that process as we're doing Holland as we speak.
<unk> and we'll wrap to add at the end of the year when I say its the linchpin for the entire one yellow piece, that's very accurate because that one technology base allows us to operate the network is one as well. So this journey, including included launching an individual brand that was yellow.
And is yellow for all of the operating companies moving forward. It also required us moving the sales force the pricing teams all that into a combined entity that we've been able to do when you talked about how much of the improvement in 2021 came from that naturally yield has.
Ben King the work that are pricing teams have done and synchronizing all of our pricing across all of these companies has really shown through and also contributed greatly to our improved performance and that staircase of financial improvement that I've been talking about for the last several quarters. So we've got a lot of this.
Still in front of us the opportunity certainly lap within our network changes Daryl and his team are starting the ZIP code changes, which will allow us to launch into removing the redundancies in our network and I'll, let their I'll pick it up there and talk a little bit about.
What's coming.
Thanks, Darren and good afternoon, Jack good to speak with you again to add to what Darren is saying I think.
Our team is Super excited about the fact that we're on schedule with the technology transformation that peace is key as Darren has already mentioned, but when we look forward into 22, we get excited about the opportunity to leverage that platform to drive better asset utilization. When you think about our employees are dockworkers or drive.
<unk>, but also our facilities and equipment a lot of the things that drive cost in a capital intensive environment that we live in we get very excited when we think about those synergies that can be created and so we are spending a lot of time as we speak focusing on exactly how that will roll out.
Because it really is about aligning our line haul network to gain those synergies when we begin to streamline the network as one consolidated company, but.
But then the additional pickup and delivery operations that will also be streamlined going forward. There's a tremendous amount of opportunity that lies ahead.
And in that process, Jack I'll close it with we're not giving up any geography, we're not giving up any capacity from a physical plant footprint. We're currently at 317 terminals and the ones that we could operate together we've already made those changes so we're in a good position.
For the setup and also driving the customer experience that started this process from the beginning.
Okay. No. That's that's all <unk> really helpful. I guess, maybe for a follow up question, then I guess, maybe to direct us to Dan if you'd like to take it but.
Dan I guess.
Just trying to think through.
You guys have been able to outperform normal seasonality. It certainly ended up in the in the third quarter.
As you think about the operational changes that have been made here the pricing and kneeled momentum in the business.
How do you think about all of that in the context of normal seasonal operating ratio progression.
I don't seasonality.
It's kind of hard to overcome.
Within a business. So could you maybe talk about that do you feel like this all this momentum in the business can help you outperformed normal seasonality.
The third quarter to the fourth quarter, how are you thinking about that.
Yeah. Thanks, Jack for the question of course, we don't give any specific guidance are targets around that but first let me say that I am I am pleased that we were able to outperform our historical sequential trend from cue to cue three as you pointed out.
Really by a couple of percentage points historically are operating ratio.
Has deteriorated from Q2 Q3 by roughly 50 basis points and this year it actually improved by 170 basis points.
And I mentioned in my opening comments that that was largely driven by executing our strategy of prioritizing yield over volume and focusing on our account level of profitability.
Now when I think about margins moving from Q3 to Q4 and you call. It out is pretty tricky, especially the seasonality of weather and everything else but.
We historically C sequential O R degradation of around 200 basis points and that's driven.
Mostly by the seasonal volume declined specifically in the month of December.
So even though we saw a nice beat versus our historical sequential trend from Q2 to Q3, I really would expect that in queue for we would with all of the challenges that come with queue for that are always there I would expect us to follow that historical sequential changed from Q3 to Q4, okay. Okay no that.
That that helps thank you for that day, and I guess, maybe.
Maybe maybe the last question before I turn it over.
We're getting towards the end of burning season, and a major topic of discussion I think on almost every single conference call has been the vaccine mandate and and the potential impact that can have on capacity within the transportation markets more broadly.
Darren is you're trying to think about it I know, it's a little bit of a touchy subject, but it would be curious if you had any thoughts on that.
And.
I know, we're still waiting on a on a formal room from Osha, but would you be curious on your on your views there.
Certainly Jack.
Yellow is waiting for guidance from Osha on the emergency transportation standard, we're communicating with our employees daily encouraging vaccination, but certainly not mandating at this point, we are collecting the vaccination status of our employees on a centralized repository.
As part of our preparedness for compliance. Additionally, yellow we've got a long standing COVID-19 internal task force coordinator that's been in place and he oversees all of our compliance efforts and then lastly, the federal contractor guidance from the safer federal workforce.
Task Force is also being reviewed closely bias in right now that compliance provision is triggered by a federal agency contract renewals, which we have not had any so like many of the others that have spoken publicly on this we are anxiously awaiting.
And also concerned around.
The implementation period, so we're hoping for.
Certainly some time to comply with that but we will comply with the federal government directions at the appropriate time and when we have clarification.
Any sense for the the impact that could maybe have on your on your capacity.
And maybe you need contingency plans on how you would you would deal with that.
I know there are a lot of a lot of uncertainties around it well.
Well, we have with what I've seen so far and also the unofficial pieces that we've seen in the media and others I think it comes down to whether there is a testing component or whether it's a mandate where the testing component certainly there's going to be cost and other things involved with that.
But I believe we can do what we've always done and work through this with our employees and a very straightforward and transparent matter to handle but we would hope that.
It comes with the testing pays and not any.
Mandates that have strict dates to go by that could create issues in the supply chain for the entire.
States are my view, okay. Okay. No. That's that's really helpful. Calling thanks, so much for the time. Thank you Jack.
Our next question comes from Scott Group from Wolf Research. Please go ahead with your question.
Hey, Thanks, good afternoon.
So.
I just wanted to start you talked about some deferred costs from 20 into 21 and 22 can you just walk through those numbers again is that will that be reflected in the EBITDA in queue for.
Oh.
Afternoon, that's the cares Act.
Deferral that you're speaking of I'll, let Diane take that yeah, Scott. So during 2020 that cares Act allowed.
Companies like us to defer the FICA taxes for about a nine month period.
So that total amount that we deferred was $85 $6 million during 2020 half of that is due at the end of 2021, which for US is $42.8 million and then the other $42.8 million is due at the end of 2022.
And that shows up in salaries costs and so an EBITDA.
Now, we expect that all along the way so it's sitting on the balance sheet right now as a liability.
Although it's just just a cash drain in queue for this year and next year.
Got Ya Okay perfect.
October tonnage down 10% can you just talk about the the sequential from September to October that you saw and then I think you had a comment that September was the best of our best EBIT.
Month of the year so far.
Did you get did you see further improvement in October.
Yeah to answer the second piece first we don't have October is final results finished yet so I'm not going to really taught speak to that too much but I'll go right to your tenant's question.
Historically LDL tenants per day from Q2 Q3, let me start there decreases by about 2% and this year decreased by six 8%.
Our strategy of prioritizing youll over volume in addressing the unprofitable afraid in our network did lead to those higher tonnage declines in our historical average however that strategy is exactly what allowed us as I mentioned to outperform a historical historical sequential change in an operating ratio.
So when I think about volumes for Q4.
Historically LCL tonnage per day declined sequentially by about 4% from Q3 to queue for.
And even though as I mentioned in my comments that October zealots. The alternatives per day was down 10% year over year on a sequential basis from September to October that was actually up 3% when historically it goes down down between three and 4%. So right now at all one month into the fourth quarter based on.
What I've seen so far.
I would say, it's reasonable to expect that are sequential tonnage.
Changed from Q3 to Q4 would be in line, if not a little bit better than our historical.
Sequential average.
And why do you think that wouldn't translate into better than normal operating ratio.
It's all of the unknown that come with Q4, and the things that happened the lower volumes, specifically that we see in December on a per day basis that has an impact on profitability and then of course the things that are just.
Come up in queue for whether it's whether that starts to chime in a little bit whatever they may be I just feel like at this point, it's fair to expect that are sequential change in or would be.
In line with our historical average.
Fair enough and then from a.
What's the plan with the G. R. I know some guys are pulling that forward into Q4, and then where are you in need more broadly and this we're raising rates, we don't care about tonnage.
When do we start to care more about a balance whereas there are a lot more to go on price.
Without regard to tonnage.
Scott on the GRE were taken ours Monday this coming Monday.
5.9%, so that'll be across all of the company. So yellow, we'll do a 5.9% on the eighth.
On the second part we're focused on account level of profitability.
And when we look at that and we look at the tonnage declines that we saw in Q3. The reason I'm comfortable with that as it was in a handful of accounts and those are in our corporate channel, which in the past has been one of our least profit has been our least profitable channel, but we're correcting that quickly.
As you know a large part of our annual revenue comes from those contract negotiations and the most egregious ones. We've already handled but we still got all of the ones that we normally do that are evenly spaced.
Each quarter of the year those are still in front of us I feel real good about how those negotiations are going I think the tonnage face levels out if we're still down there.
Okay from the way we are managing the network you heard Darryl mentioned, the purchase transportation coming down steadily each quarter of the year I like reducing our exposure to that but also we have capacity available for profitable freight where the second largest LDL care in North America with 370.
<unk> terminals and were available for that growth as long as it's profitable and will be calculated and what we do but the results in September just proved to me that we're on the right track, we have the right strategy and I will certainly be very stable and my outlook moving forward on profitability.
Okay, and then last one just quickly terminal count where you are today, where you think you're going.
317 terminals right now as I mentioned earlier, we were talking about one yellow the ones that we could put together we've already done this number will change slightly but.
It'll land around $308 to 300, and then by the end of 22, so there's not a lot more change coming in our physical footprint, we're going to protect our capacity and our geography.
Thank you guys appreciate it thank you.
And our next question comes from Jeff Coffin from a vertical research partners. Please go ahead with your question.
Thank you very much and congratulations terrific quarter.
Thanks, how he was just kind of curious in the tonnage decline that you saw was.
Any of it tied to industries that might be under exceptional pressures say for example, automakers things like that.
Versus say just general business levels down.
No.
Is not primarily in one bucket other than being corporate bucket. It is in those larger shippers and it comes down to.
Lane level, I said account level of profitability and that's certainly the case, but as you know.
The sophistication of our pricing tools, now and especially since we've put our pricing teams together and we're looking at this from a one yellow lands were able to say the business across all facets and all length of halls, and sand dune that and make sure that what we're moving as the best rates of yellow and Jeff is.
You know and I've heard you say there is no bad Fraser's just bad pricing.
Correcting that quickly.
In your 10-Q U noted that.
You were able to control labor expense is a combination of.
An increase pay do employees and then you utilize some furloughs reductions were necessary.
How much.
Growth could you accommodate and bring back people off furlough before you had to go out and add new bodies.
We don't have any union employees on furlough.
We've we've got the full.
Team in place and we're hiring daily as Darryl mentioned are hiring efforts I'm excited about the 16 driving academies and the attention we're putting around that and my plan is to continue that hiring Haven Q4, and Q1, when we normally don't operate all of our schools.
Because any extra labor that we can bring out and we will use that to reduce our purchase transportation exposure.
Okay. Thank you I just two other quick myths.
So congratulations you brought in 2100 tractors 2300 trailers some containers.
I know, we'd always talked about the idea that this new equipment is replacing some very old equipment and the network and there should be a pretty nice maintenance savings.
As a lot of this equipment's come on in the last say six eight months.
How dues that maintenance benefit phase in and then kind of what inning Roy in terms of seeing that benefit.
Yeah, and Yeah, Hey, Jeff I'll start and then I'll kick it to Daryl for some more commentary so in terms of what ending we've taken delivery of all the new equipment. That's obviously the first piece and that goes into service right away. So the benefit we expect to see from the new tractors, whether that's lower maintenance costs or better affiliate.
<unk> These business day, we start seeing that on day one.
And then there is that lag time that we're we're we're probably at six seventh inning in a purging all of the old stuff and along with that comes the cost of getting that to where it needs to be pulling it out of service all of those types of things but.
We should be completed with that replacement exercise here in the next three or four or five months or so it does take some time to work through that and there's some costs associated with it but we absolutely are seeing the the financial benefit from running all of the new tractors and trailers.
Mmk Similarly, as you finish the Holland integration how.
How much expense starts to drop off in terms of the the one yellow coordination and integration.
Jeff I haven't given any guidance around that but things batting piece about having the technology complete at the end of this year is that gives us the visibility to really do the network pieces that we want to do as you know we've already made the contractual changes in our labor agreements to.
Date that so the only thing in our way was the technology pace and having the visibility of all companies through one lands, we've got that as of the end of the year. So we get to start doing the ZIP code rationalization and where we've got two facilities in the same city were able to run those as north South.
East West we will not be sending two drivers two tractors two trailers to the same customer on a daily basis and that are not only phrase up the asset utilization that Darrell spoke to it takes the most important piece of our network and that's our drivers and makes them more productive.
And available. So this is a great opportunity for US we're excited about it and what I have spoken about on the financial side of the house is that it's a staircase of financial improvement along the way I think the last.
Two quarters, we've shown that and that's why I want to continue to demonstrate and communicate and be as transparent as I can alone that way, but we're it's a show me story and we're trying to prove that each quarter as we move alone.
Alright, Thank you and last one.
You mentioned you have taken most of the equipment, a little bit more coming into the fourth quarter.
We're now at that time of year, where capital budgeting for the new year.
How do you think about going forward cap spend now.
Now that this big.
Bubble has come through over the past year year and a half do.
Do we think about it is I want to bring in X percent of equipment do we think about it is I want to spend X amount of dollars.
How should we think about your capital budget as we move forward yes.
This is Darren and I love trucks, I'll, just start by saying that but I'll, let my CFO give you.
Our thought process for 2022, Thank you Jeff.
So we haven't finalized our 2022 capex plans quite yet, but as we have discussed before.
2021 is elevated capex levels that were supported by the U S. Treasury trials be funds allowed us to make almost two years worth of equipment refresh inside of a 12 month period. So going forward as we think about that we plan of reverting back to what are more normalised equipment refresh cycle would be so it's <unk>.
Annabelle, even though we're not given the dollar guidance quite yet it's reasonable to expect that our capex for 2022 would be significantly lower than 2021.
Mmk, well congratulations and thank you.
Thank you.
And ladies and gentlemen at this time when today's question and answer session I'd like to turn the floor back over to management for any closing remarks.
Thank you operator, and thanks again to everyone for joining US today, please contact Tony with any additional questions that you may have this concludes our call an operator I'm turning the call back to Ya.
And ladies and gentlemen, with that we will conclude today's conference call. We do thank you for attending today's presentation. You may now disconnect your line.
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Good afternoon, everyone and welcome to yellow corporations third quarter 2021 earnings call.
All participants will be in a listen only mode.
After todays presentation, there will be a question and answer session.
Also note todays event is being recorded.
At this time I'd like to turn the conference call over to Tony Carreno, Vice President of Investor Relations. Sir. Please go ahead.
Thank you operator, and good afternoon, everyone.
Welcome to yellow corporations third quarter 2021 earnings conference call.
Joining us on the call today are Darren Hawkins Chief Executive Officer.
Olivia Air Chief Financial Officer, and Daryl Harris President.
During this call we may make some forward looking statements within the meaning of federal Securities laws.
These forward looking statements and all other statements that might be made on this call, which are not historical facts are subject to uncertainty and a number of risks and therefore actual results may differ materially.
Format of this call does not allow us to fully discuss all of these risk factors.
A full discussion of the risk factors that could cause results to differ please refer to this afternoon's earnings release, and our most recent SEC filings, including our forms 10-K and 10-Q.
These items are also available on our website at my yellow Dot com.
Additionally, please see today's release for a reconciliation of net income or loss to adjusted EBITDA.
In conjunction with today's earnings release, we issued a presentation, which may be referenced during the call. The presentation was filed in an 8-K along with the earnings release is available on our website.
I will now turn the call over to Darren.
Thanks, Tony and good afternoon, everyone. Thank you for joining our call before I discuss Q3, I would like to recognize and thank our nearly 30000 employees truckers are heroes and they continue to rise to the challenge and provide a central freight transportation service.
As to the customers and communities we serve our employees are in a central piece of the U S supply chain and I am grateful for their efforts.
Turning to Q3, we reported adjusted EBITDA of 94, 4 million, a greater than 50% increase compared to a year ago. We are executing our yield strategy that is not only benefiting the company by improving the quality and profitability of the freight flowing through our more than three <unk>.
<unk> terminals, but it is also helping us manage through the industry wide shortage of qualified drivers and dock workers and addition to purchase transportation headwinds the strong pricing trends that we saw in Q2 gained momentum during Q3 and led to a year over year increase in <unk>.
<unk> revenue per hundredweight, including fuel of 27%.
Favorable year over year pricing trends have carried into Q4 for the month of October yellow average between nine and 10% on contract negotiations.
Freight backdrop remains strong driven by continued consumer and business demand. In addition to a limited ability to expand capacity across the supply chain.
As we look ahead demand for the valuable capacity and services, we provide to the U S economy is poised to remain at an elevated level into 2022.
Although our year over year <unk> tonnage per day decreased in Q3, let me be clear that our long term strategy is to grow the business. This incredibly strong freight cycle as a tailwind as we expedite the culling of less profitable freight from the network and simultaneously execute them.
Multiyear transformation to one yellow.
We remain on schedule to have all of our companies on a single operating system across the network, which is the technology linchpin for one yellow during Q3 right away was converted and is now operating on the one yellow technology platform, joining wire sea freight and new Penn We also.
We expect to convert Holland around the end of this year when completed this will be the cornerstone of our fully integrated network and it will allow us to continue streamlining our operations effective Tuesday of next week, we will rebrand Henry logistics as yellow logistics too.
Align with the journey to one yellow the change is customer focused and will allow them to ultimately work with one brand across all of our extensive core L. T L resources capabilities and multi mode logistics solutions.
Through the end of Q3, we have acquired a majority of the equipment expected in our 2021 capital expenditures plan, we placed orders for much of the new equipment in 2020, which minimized significant delays in deliveries. This year during the first three quarters of 2021, we have acquired more.
And then 'twenty 100, tractors 2300 trailers and 600 containers not only are these investments having a positive impact on the age of our fleet, but over time, we expect them to mitigate maintenance expanse and help our sustainability efforts through enhanced safety and improved fuel efficiency.
I will now turn the call over to Diane who will share additional details about the quarter.
Thank you Darren and good afternoon, everyone. Our third quarter 2021, operating revenue was $1 3 billion, an increase of 10% compared to $1 8 billion in 2020.
Operating income was $48 4 million compared to $19 4 million in the prior year.
Adjusted EBITDA for the third quarter, 2021 was $94 4 million compared to $62 million in the third quarter 2020.
Adjusted EBITDA for the last 12 months was $248 4 million as of the end of the third quarter.
Our revenue growth of 10% in the third quarter reflected a year over year <unk> tonnage per day decline of nine 4%.
Driven by a six 8% decrease in <unk> shipments per day and at two 8% decrease in <unk> weight per shipment.
Sequential LCL tonnage per day trends compared to the prior year, whereas follows.
July down five 7% August down eight 5% and September down 13, 4%.
On a preliminary basis October LCL tonnage per workday was down around 10%.
Including fuel surcharge third quarter LTM revenue per hundredweight was up 27% and LTM revenue per shipment was up 17, 3% compared to the prior year.
Excluding fuel surcharge LTM revenue per hundredweight was up 15, 6% and LTM revenue per shipment was up 12, 4%.
Our near term focus on prioritizing yield over volume.
Long with the execution of targeted pricing strategies to address unprofitable freight in our network and to mitigate our highest cost purchased transportation expenses were key to our improved performance in Q3.
<unk> expenses as a percentage of revenue have decreased from 16, 7% in Q1 2000, 16.0% in Q2 and were 15, 4% in Q3.
During the quarter, we saw sequential improvement in adjusted EBITDA operating income and operating ratio, culminating in September being the best performing month during the quarter and thus far in 2021.
Total liquidity at the end of the third quarter was $409 million compared to $454 million at the end of the third quarter 2020.
And total capital expenditures for the third quarter were $97 million compared to $17 million a year ago.
Year to date capital expenditures through the third quarter were $443 million and we still expect total capital expenditures for 2021 to be in the range of $480 million to $530 million.
Also pertaining to liquidity during 2020, we deferred payment of $85 $6 million for certain payroll taxes under provisions of the cares Act.
As a reminder, half of that deferral $42 8 million comes due and will be paid in December of 2021.
And the other half will be due in December of 2022.
With that I will turn the call over to Darryl.
Thank you Dan and good afternoon, everyone.
Since the beginning of the year, we have worked to reduce the reliance on purchase transportation expense.
In particular, the use of local cartage and over the road PT.
Additional actions we have taken include.
Purging the network of short term rentals as we acquired newer equipment.
And adjusting our line haul network to minimize the use of more expensive purchase transportation in certain lanes.
As you heard from Dan. These efforts have allowed us to reduce PT spend as a percentage of revenue.
Even as we continued to experience strong demand and a backlog U S supply chain.
<unk> is our second largest expense category outside of salaries and wages and we will continue to closely manage achieves.
Another area of emphasis has been the enhancement of our hiring and retention strategies.
We remain committed to our long term strategy to grow our own safe drivers.
Our 16 driver academies sites were fully utilized in Q3 with a record number of participants in the program.
In addition, we have held 127 hiring events.
14 job fairs across the country year to date.
And starting this winter.
We are launching an exciting new recruiting effort called drive for diversity, where we will focus our efforts on job seekers and underserved communities.
With a growing need for skilled labor in our country, we intend to be on the forefront to attract talented individuals that may have never worked in trucking, including women minorities and younger people.
As you heard from Darren we are executing on our transformation strategy as.
As we unite our companies to become one yellow.
As we combine them, we are automating centralizing and standardizing our operations across the business.
We are well on our way to becoming a super regional carrier that will enhance the value proposition for our customers by getting faster, creating more next day lanes and offering regional service in new locations.
When the journey is complete we will go to market as one yellow a superregional carrier laser focused on enhancing the customer experience and growing our business.
In closing.
We are making progress and our team of over 30000 freight professionals is moving the company in the right direction.
We are in one of the most unique and challenging supply chain environments that we've ever seen.
Yet our employees remain focused on meeting the needs of our customers, while maintaining steady progress on our journey to one yellow.
I will now turn the call back over to Darren for some closing comments.
Thank you Darryl.
Im proud of the progress we made in Q3 and I am confident that the transformation of one yellow positions us for continued operational and financial improvement in the future.
We have the right team at yellow to operate a superregional LPL network that safely meets our customers needs with speed reliability and quality.
Thanks for your time. This afternoon, we would now be happy to answer any questions that you may have.
Ladies and gentlemen at this time, we will begin the question and answer session.
Our first question today comes from.
Jack Atkins from Stephens. Please go ahead with your question.
Okay, Great Darren Darryl Dan.
Congratulations on a great quarter. Good afternoon. Thank you Jack good afternoon to you afternoon, Jack Alright, well I guess, maybe if I could start either Darren or Darrell whoever would like to take this and maybe you would both like to address it but obviously, we sort of look out here over the next.
Several quarters it feels like there's a lot more to come with one yellow when that one yellow initiative.
As you guys combine your operating entities on the asset based side.
I would be curious if you could maybe talk about.
I just wonder what inning are you in in terms of.
Implementing one yellow I know you have one more operating company to go by the end of the year, but.
How much of the improved performance that you've seen over the last several quarters is related to that initiative, maybe beginning to take hold.
Is it really sort of more 2022 that you think youre going to start seeing.
The efficiencies from that begin to show up in the P&L.
Jack I'll start with that and then allow Daryl to wrap it up I would say we're in the sixth inning, the longest and most difficult part of one yellow is a technology transition we started that several years ago and working through that.
Made the commitment that we would not allow our customers to have any negative impact to that process. So we have been very stable focused and paced as we moved each company over to the yellow technology that has gone very well and I'm proud to say that we're right at the end of that process as were doing Holland as we speak.
And we'll wrap that at the end of the year when I say its the linchpin for the entire one yellow piece and Thats very accurate because that one technology base allows us to operate the network as one as well. So this journey, including included launching an individual brand that was yellow.
Is yellow for all of the operating companies moving forward. It also required us moving the sales force the pricing teams all of that into a combined entity that we've been able to do.
When you talked about how much of the improvement in 2021 came from that naturally yield has been king the work that our pricing teams have done and synchronizing all of our pricing across all of these companies has really shown through and also contributed greatly to our improved performance in.
That staircase of financial improvement that I've been talking about for the last several quarters, but we've got a lot of this still in front of us the opportunity certainly lapped within our network changes Daryl and his team are starting the ZIP code changes, which will allow us to launch into removing the redundancies in our network and <unk>.
I'll, let Darren I'll pick it up there and talk a little bit about.
What's coming.
Thanks, Darren and good afternoon, Jack good to speak with you again to add to what Darren is saying I think our team is super excited about the fact that we are on schedule with the technology transformation that piece is key.
As Darren has already mentioned, but when we look forward into 'twenty two we get excited about the opportunity to leverage that platform to drive better asset utilization. When you think about our employees our dockworkers, our drivers, but also our facilities and equipment a lot of the things that drive costs in a capital intensive environment that we live.
And we get very excited when we think about those synergies that can be created and so we're spending a lot of time as we speak focusing on exactly how that will rollout.
Because it really is about aligning our line haul network to gain those synergies when we began to streamline the network as one consolidated company.
But then the additional pickup and delivery operations that will also be streamline going forward theres a tremendous amount of opportunity that lies ahead.
And in that process, Jack I'll close it with we're not giving up any geography, we're not giving up any capacity from a physical plant footprint. We're currently at 317 terminals and the ones that we could operate together we've already made those changes so we're in a good position.
For the setup and also driving the customer experience.
<unk> started this process from the beginning.
Okay. That's all really helpful. I guess, maybe for a follow up question, then and I guess, maybe to direct this to Dan if you'd like to take it but.
Dan I guess I'm, just trying to think through.
You guys have been able to outperform normal seasonality certainly end up in the third quarter.
As you think about the operational changes that have been made here.
Pricing and yield momentum in the business.
How do you think about all of that in the context of normal seasonal operating ratio progression.
I don't know seasonality, sometimes it's kind of hard to overcome.
Within our business. So can you maybe talk about that do you feel like this all of this momentum in the business can help you outperform normal seasonality.
From the third quarter to the fourth quarter, how are you thinking about that.
Yeah. Thanks, Jack for the question and of course, you know, we don't give any specific guidance or targets around that but first let me say I am pleased that we were able to outperform our historical sequential trend from Q2 to Q3 as you pointed out.
Really by a couple of percentage points historically, our operating ratio.
Has deteriorated from Q2 to Q3 by roughly 50 basis points and this year it actually improved by 170 basis points.
And I mentioned in my opening comments that that was largely driven.
By executing our strategy of prioritizing yield over volume and focusing on our account level profitability.
And when I think about margins moving from Q3 to Q4 and you called it out it's pretty tricky, especially the seasonality of weather and everything else but.
We historically see sequential or degradation of around 200 basis points and Thats driven.
Mostly by the seasonal volume decline specifically in the month of December.
So even though we saw a nice beat versus our historical sequential trends from Q2 to Q3, I really would expect that in Q4, we would with all of the challenges that come with Q4 that are always there I would expect us to follow that historical sequential change from Q3 to Q4, okay. Okay.
That helps thank you for that Dan and I guess, maybe.
Okay, maybe the last question before I turn it over.
We're getting towards the end of earning season and a major topic of discussion I think on almost every single conference call has been the vaccine mandate and the potential impact that could have on capacity within the transportation markets more broadly.
Darren as you sort of think about it I know, it's a little bit of a touchy subject, but would be curious if you had any thoughts on that.
And.
I know, we're still waiting on them.
Formal rule from Osha, but would just be curious on your on your views there.
Certainly Jack.
Correct CLO is waiting for guidance for Moshe on the emergency transportation standard, we're communicating with our employees daily encouraging vaccination, but certainly not mandating at this point, we are collecting the vaccination status of our employees in a centralized repository.
As part of our preparedness for compliance.
Additionally, yellow we've got a long standing COVID-19, internal task force coordinator.
<unk> been in place and he oversees all of our compliance efforts and then lastly, the federal contractor guidance from the safer Federal workforce Task Force is also being reviewed closely by us and right now that compliance provision is triggered by a federal agency contract renewals, which we have not had any.
Like many of the others that have spoken publicly on this we are anxiously awaiting and also concerned around.
The implementation period, so we're hoping for.
Certainly some time to comply with that but we will comply with the <unk>.
Federal government directions at the appropriate time, and when we have clarification.
Any sense for the impact that could maybe have on your on your capacity.
And maybe any contingency plans on how you would you would deal with that.
I know there are a lot of lot of uncertainties around it.
Well, we have with what I've seen so far and also the unofficial pieces that we've seen in the media and others I think it comes down to whether there is a testing component or whether it's a mandate where the testing component certainly theres going to be cost and other things involved with that but I believe we can.
And do what we've always done and work through this with our employees in a very straightforward and transparent manner to handle but we would hope that.
It comes with the testing phase and not any.
Mandates that have strict dates to go buy that can create issues in the supply chain for the entire unit.
Added states from my view.
Okay. No that's really helpful color. Thanks, so much for the time, Thank you Jack.
Our next question comes from Scott Group from Wolfe Research. Please go ahead with your question.
Hey, Thanks, good afternoon.
So.
I just wanted to start you talked about some deferred costs from 'twenty into 'twenty. One 'twenty. Two can you just walk through those numbers again is that will that be reflected in the EBITDA in Q4.
Okay.
Afternoon.
The cares Act.
Deferral that you're speaking of I'll, let Dan take that yes, Scott. So during 2020, the cares Act allowed.
Companies like us to defer the FICA taxes for about a nine month period.
So that total amount that we deferred was $85 $6 million during 2020 half of that is due at the end of 2021, which for US is $42 8 million and then the other $42 8 million is due at the end of 2022.
And that shows up in salaries costs and so in EBITDA.
No we expense it all along the way so it's sitting on the balance sheet right now is as a liability.
Hello.
A cash drain in Q4 this year and next year.
Got you okay perfect.
October tonnage down 10% can you just talk about the sequential from September to October that you saw and then I think you had a comment that September was the best our best EBIT month of the year so far.
Did you guys did you see further improvement in October.
Yeah to answer your second piece first we don't have October's final results finished yet so I'm not going to really speak to that too much but I'll go right to your tonnage question.
Historically LCL tonnage per day from Q2 to Q3, let me start there decreases by about 2% and this year decreased by six 8%.
Our strategy of prioritizing yield over volume in addressing the unprofitable freight in our network did lead to those higher tonnage declines than our historical average however that strategy is exactly what it allowed us as I mentioned to outperform our historic.
Historical sequential change in an operating ratio.
So when I think about volumes for Q4.
Historically, our LTM tonnage per day declined sequentially by about 4% from Q3 to Q4.
And even though as I mentioned in my comments that October as LCL tonnage per day was down 10% year over year on a sequential basis from September to October that was actually up 3% when historically it goes down down between 3% and 4%.
So right now all in all one month into the fourth quarter based on what I've seen so far I.
I would say its reasonable to expect that our sequential tonnage.
<unk> from Q3 to Q4 would be in line, if not a little bit better than our historical.
Sequential average.
And why do you think that wouldn't translate into better than normal operating ratio.
It's all of the unknowns that come with Q4, and the things that happened the lower volumes, specifically that we see in December on a per day basis that has an impact on profitability and then of course, you know the things that are just that.
It come up in Q4, whether it's whether that starts to chime in a little bit whatever they may be I just feel like at this point, it's fair to expect that our sequential change in or would be.
In line with our historical average.
Fair enough and then from a.
What's the plan with the G. R. I know some guys are pulling that forward into Q4, and then where are you in the more broadly and that's we're raising rates, we don't care about tonnage.
When do we start to care more about a balance or is there a lot more to go on price.
Without regard to tonnage.
Scott on the <unk>.
We're taking hours Monday discounting Monday.
At five 9%, so that'll be across all of the company so yellow.
We'll do a 5.9% on the eighth.
The second part we are focused on account level profitability.
And when we look at that and we look at the tonnage declines that we saw in Q3. The reason I am comfortable with that as it was in a handful of accounts and those are in our corporate channel, which in the past has been one of our least profit that has been our least profitable channel, but we're correcting that quickly.
You know a large part of our annual <unk>.
Revenue comes from those contract negotiations and the most egregious ones, we've already handled but we still got all the ones that we normally do that or evenly spaced.
Each quarter of the year those are still in front of us I feel real good about how those negotiations are going I think the tonnage face levels out.
If we're still down that is okay from the way we're managing the network you heard Darryl mentioned, the purchase transportation coming down steadily each quarter of the year I like reducing our exposure to that but also we have capacity available for profitable freight we're the second largest LTM carrier.
In North America, with 317 terminals and were available for that growth as long as it's profitable and will be calculated and what we do but the results in September just prove to me that we're on the right track, we have the right strategy and I will certainly be very stable and the outlook moving forward on.
<unk> ability.
Okay, and then last one just quickly terminal count where you are today, where you think youre going.
We're at 317 terminals right now as I mentioned earlier, we're talking about one yellow the ones that we could put together we've already done this number will change slightly but.
It will land around 308% to 309 by the end of 'twenty, two so theres not a lot more change coming in our physical footprint.
Going to protect our capacity and our geography.
Thank you guys appreciate it thank you.
And our next question comes from Jeff Kauffman from vertical Research partners. Please go ahead with your question.
Thank you very much and congratulations terrific quarter.
Yes.
Thanks.
Just kind of curious in the tonnage decline that you saw was.
Any of it tied to industries that might be under exceptional pressures say for example, automakers things like that.
Versus say just general business levels down.
No.
It's not primarily in one bucket other than being corporate bucket is in those larger shippers and it comes down to <unk>.
Lane level, I've said account level profitability and Thats certainly the case, but as you know.
The sophistication of our pricing tools, now and especially since we put our pricing teams together and we're looking at this from a one yellow lands were able to save the business across all facets and all length of hauls and fine tune that and make sure that what we're moving is the best rates of yellow and Jeff as you.
And I've heard you say there is no bad freight there is just bad pricing and.
We're correcting that quickly.
In your 10-Q, you noted that.
You were able to control our labor expense is a combination of.
And increased pay to employees and then you utilize some furloughs and reductions were necessary.
How much.
Growth could you accommodate and bring back people off furlough before you had to go out and add new bodies.
We don't have any union employees on furlough so.
We've got the full.
Team in place and we're hiring daily.
Darryl mentioned, our hiring efforts I am excited about the 16 driving academy and the attention we're putting around that and my plan is to continue that hiring even through Q4 and Q1. When we normally don't operate all of our schools because any extra labor that we can be.
Alan will use that to reduce our purchase transportation exposure.
Okay. Thank you just two other quick Mips.
So congratulations you brought in 'twenty 100, tractors, 'twenty 300 trailers some containers.
I know, we had always talked about the idea that this new equipment is replacing some very old equipment in the network and there should be a pretty nice maintenance savings.
A lot of this equipment come on in the last say six to eight months.
How dues that maintenance benefit phase in and kind of what inning are we in terms of seeing that benefit.
Yes, and yes.
I'll start and then I'll.
Ticket to Daryl for some more commentary so in terms of what inning, we've taken delivery of all of the new equipment. That's obviously, the first piece and that goes into service right away. So the benefit we expect to see from the new tractors, whether thats lower maintenance cost or better fuel efficiency.
Do we start seeing that on day one.
And then there is that lag time that we're we're we're probably at 67th inning in of purging all of the old stuff and along with that comes the cost of getting that to where it needs to be pulling it out of service all of those types of things, but we.
We should be completed with that replacement exercise here in the next 345 months or so it does take some time to work through that and there are some costs associated with it but we absolutely are seeing the financial benefit from running all of the new tractors and trailers.
Okay, and similarly, as you finish the Hollander integration.
How much expense starts to drop off in terms of though the one yellow coordination and integrations.
Jeff I haven't given any guidance around that but the exciting piece about having the technology complete at the end of this year is that gives us the visibility to really do the network pieces that we want to do as you know we've already made the contractual changes in our labor agreements to.
Date that so the only thing in our way was the technology piece and having the visibility of all companies through one lens, we've got that as of the end of the year. So we get to start doing the ZIP code rationalization and where we've got two facilities in the same city, we're able to run those as north South.
East West.
We will not be sending two drivers to tractors two trailers to the same customer on a daily basis and that will not only frees up the asset utilization that Darren spoke to it takes the most important piece of our network and that's our drivers and makes them more productive.
And available. So this is a great opportunity for US we're excited about it and what I have spoken about on the financial side of the house is that it's a staircase of financial improvement along the way I think the last.
Two quarters, we've shown that and that's why they don't want to continue to demonstrate and communicate and be as transparent as I can alone that way, but we're it's a show me story and we're trying to prove that each quarter as we move alone.
Alright, Thank you and last one.
You mentioned, you've taken most of the equipment, a little bit more coming into the fourth quarter.
We're now at that time of year, where where capital budgeting for the new year.
How do you think about going forward cap spend.
Now that this big.
Bubble has come through over the past year year and a half.
Do we think about it is I want to bring in X percent of equipment do we think about it is I want to spend X amount of dollars.
How should we think about your capital budget as we move forward yes.
As Darren and I Love trucks, I'll, just start by saying that but I'll, let my CFO give you the.
Our thought process for 2022, thank you.
Yes, so we haven't finalized our 2022 Capex plan quite yet, but as we have discussed before.
2020 one's elevated capex levels that were supported by the U S. Treasury tranche B funds allowed us to make almost two years' worth of equipment refresh inside of a 12 month period. So going forward as we think about that we plan on reverting back to what a more normalized equipment refresh cycle would be so it's really.
But even though we're not giving the dollar guidance quite yet it's reasonable to expect that our capex for 2022 would be significantly lower than 2021.
Okay, well congratulations and thank you.
<unk>.
Ladies and gentlemen at this time, we'll end today's question and answer session I would like to turn the floor back over to management for any closing remarks.
Thank you operator, and thanks again to everyone for joining us today.
Please contact Tony with any additional questions that you may have this concludes our call and operator I'm turning the call back to you.
Ladies and gentlemen, with that we will conclude today's conference call. We do thank you for attending today's presentation.
You may now disconnect your lines.